The Treasury 10 year yield curve direction is your crystal ball for forecasting where assets prices are heading, whether it be real estate, stocks, the USD exchange rate, commodity prices, and even alternative assets.

So why is the treasury 10 yield curve so important?

Treasury yields impact the cost of servicing debt in USD. So, rising yields are a headwind on corporate profitability. A higher yield environment where borrowing capital costs more also dampens investment. High leverage growth stocks, which rely on low borrowing costs to keep afloat, are worse impacted by rising yields. So, when the Treasury 10-year yield rises capital flows from growth to value stocks.

Moreover, the treasury 10 yield curve direction also impacts the international economy and global financial markets.

Yield Curve
USA debt

Treasury yields impact the cost of servicing debt in USD

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The US dollar is the world’s reserve currency, with more than half of the global economic activity conducted in US dollars.

All the vital commodities used in industry and food production are predominantly priced in US dollars. To give you some idea of the dollarization of the world, here are a few facts and figures. In 2014 52% of international trade was conducted in US dollars, 62% of global foreign reserves were held in US dollars (2020), and around half of all cross-border bank loans and international debt securities are denominated in US dollars. The world already has a global currency, the US dollar.

When Treasury 10-year yield rises, that impacts global borrowing costs, which is a headwind on global stocks and the economy.

US dollar - half global economic activity

The US dollar is the world’s reserve currency, with more than half of the global economic activity conducted in US dollars

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The Treasury 10-year yield curve trajectory will also give you a heads up concerning the USD

Treasury 10-year yield curve is the financial system’s moon. It gives gravity which impacts the ocean’s tide of global capital. So, when the Treasury 10-year yield rises capital flows into treasuries, and because demand for treasuries and US dollars are complimentary, the USD appreciates on the foreign exchange.

Moreover, if you can forecast USD trajectory, then you can figure out where commodity prices are heading, bearing in mind that the value of USD and commodities are inversely related.

When the USD appreciates, commodity prices tend to fall and vice versa” – Wealth Training Company

When the USD appreciates, commodity prices tend to fall and vice versa.

With Treasury, the 10-year yield curve trajectory gives investors a crystal ball on where assets prices are heading. Here is our take on where future yields will be

In a few words, we believe Treasury 10-year yields will head higher due to supply-demand dynamics. Fed tapering of 15B US dollars a month consisting of 10B dollars of treasuries and 5B dollars of mortgage-backed securities could lead to liquidity issues in the bond market. Furthermore, on the supply side, US trillion-dollar infrastructure spending will be funded by monetizing the debt, in other words, the supply of treasuries will increase.

So, with the demand for treasuries falling due to Fed tapering and supply increasing from funding, a massive US deficit spending program treasuries price will fall and its corresponding yield will rise.

Here is the takeaway of this piece, we see a risk-off environment playing out

We are no longer confident about the stock melt-up continuing. Precious metals and commodities could get hit by rising yields and USD.

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